Spanish Billionaire Alvarez Unveiled With The English Cut

By Kambiz Foroohar and Manuel Baigorri -
Feb 8, 2013

Isidoro Alvarez insists on maintaining complete command over the Spanish retail empire he inherited from his uncle 24 years ago.

The 77-year-old chairman of Madrid-based El Corte Ingles SA, Europe’s largest department store chain, works 14-hour days and deflects any talk about succession plans. His signature look -- white shirt under a black suit -- is favored even on weekends, when he often makes surprise visits to some of the company’s 85 stores to test the staff.

According to author Javier Cuartas, the media-shy retail baron offered to pay him to stop writing a book about the company. When Cuartas refused, Alvarez bought the entire 20,000- copy run of “Biografia de El Corte Ingles” from local bookstores on its first day in print.

“The chairman has absolute control because he is a chairman for life,” Cuartas, now a regional correspondent at the Spanish daily newspaper El Pais, who spent 10 years investigating the company, said in a phone interview. “Nothing is approved without his signature.”

Such attention to detail has helped make Alvarez a billionaire. The Spaniard controls 15 percent of El Corte Ingles, according to Orbis, a database of company information published by Bureau van Dijk. The closely held company, which generated 15.8 billion euros ($21.2 billion) in sales in 2011, is the country’s biggest retailer by revenue and one of its largest employers, with a workforce of about 100,000. It is also the third-biggest department store chain in the world by sales, after Hoffman Estates, Illinois-based Sears Holdings Corp. (SHLD) and Cincinnati, Ohio-based Macy’s Inc. (M), according to data compiled by Bloomberg.

Prime Locations

El Corte Ingles is valued at about $10 billion, based on the average enterprise value-to-sales and enterprise value-to- earnings before interest, taxes, depreciation and amortization multiples of three publicly traded peers: Macy’s, London’s Marks & Spencer Group Plc. (MKS) and Seattle-based Nordstrom Inc. (JWN)

That gives the septuagenarian a net worth of at least $1.5 billion, according to the Bloomberg Billionaires Index. Enterprise value is defined as market capitalization plus total debt minus cash. A liquidity discount of 15 percent is applied to reflect the company’s slower growth rate as compared to its publicly-traded peers and the effect of the Spanish recession on its profitability.

The company’s department stores are situated in some of most desired locations in Spain. El Corte Ingles, which translates as The English Cut -- a reference to its origins as a tailor shop -- also operates supermarkets, hypermarkets and discount stores, as well as travel agencies, an insurance company and a finance division that issues store credit cards.

Lavish Doting

Providing superior service and quality merchandise has been part of Alvarez’s mantra for decades. Armies of formally dressed salespeople flock to shoppers in the company’s brightly-lit stores. Customers unhappy with a purchase can return it whenever they want, no questions asked. Every year, the company sends birthday cards from Alvarez to 11 million store card holders.

For all of the doting he lavished on his customers, Alvarez could do little to stop a slide in business brought on by a five-year-recession that has pushed unemployment in Spain to 26 percent. In 2011, company’s sales fell 3.9 percent from a year earlier, according to the company’s annual report. Net income fell 34 percent to 210 million euros. The downturn erased more than $1 billion from his net worth.

“The company is facing heavily shrinking margins because they didn’t see the crisis coming,” said Javier Hombria, a specialist in equity sales at Ahorro Corp. Financiera in Madrid. “Competing on price is not something the company is used to.”

Discounted Pricing

Alvarez’s slow reaction to Spain’s economic plight might have something to do with his controlling nature, and has forced El Corte Ingles to embark on a new strategy: discounted pricing. Last year, the department store cut prices on consumer goods such as food, perfumes and hardware. It also began offering half price sales on sporting goods.

“The company is managed in a paternalistic way,” Rafael Peinado Cortes, 61, a union representative who worked as a salesman for the retailer for 36 years, said in a phone interview Feb. 2. “Everything comes down to Isidoro Alvarez and nothing happens without his involvement.”

Even so, Alvarez will probably stick to its customer- friendly roots, according to Charles Allen, an analyst for Bloomberg Industries in London.

“El Corte Ingles is one the best-run department stores in Europe,” he said.

Stacking Shelves

Alvarez’s uncle, Ramon Areces, was born in 1904. As a teenager, he emigrated to Cuba, where he took a job at El Encanto department store, sweeping sidewalks and stacking shelves. He returned to Spain in the 1930s, and used his savings -- as well as money he borrowed from family members -- to buy a tailor’s shop called El Corte Ingles that was located in the center of Madrid. Areces immediately shuttered the tailor business and transitioned to retail, keeping only its name.

The timing wasn’t perfect. A year later, in 1936, the Spanish Civil War engulfed the country. Still, the retailer, which started with just seven employees, continued to expand. Areces kept the company in family hands, with his brothers Celestino and Luis, as well as an uncle, Cesar Rodriguez, forming part of the management team.

The company expanded in the 1960s and 1970s, opening department stores in cities such as Barcelona and Bilbao.

Inside Look

Areces, who had no children, groomed Alvarez as his successor. To protect the long-term control of the company, he created the Fundacion Ramon Areces, a Madrid-based charitable organization that funds scientific and medical research and holds about 60 percent of the company’s shares with Alvarez, Cuartas said. The billionaire owns 15 percent, according to Orbis. Other family members and employees split the rest.

After taking over in 1989, Alvarez continued the company’s expansion policy. In 1995, he bought the chain’s biggest competitor, Galerias Preciados, which had gone bankrupt.

Outsiders had a glimpse into the company’s ownership structure during a 7-year-legal battle between family shareholders and El Corte Ingles.

In 2005, Cesar Areces Fuentes, son of founder Ramon Areces’ brother, Celestino, decided to sell his 0.7 percent stake. Celestino’s 2.8 percent stake had been split between his four children after his death. Under company bylaws, El Corte Ingles had the preferred rights to buy the shares.

Competing Valuation

At the time, a company auditor valued the company at 5.6 billion euros based on the its historical book value. A competing valuation was done for the Areces Fuentes family by two IESE business school professors: Jose Manuel Campa, who in May 2009 became the country’s deputy finance minister, and Harvard-educated Pablo Fernandez. Using a discounted cash flow analysis, they valued the department store chain at between 14.5 billion euros and 16.5 billion euros, according to Fernandez.

The dispute went through several courts before being decided by the Spanish Supreme Court, which found fault with both valuations. The court said the company’s auditor did not reflect El Corte Ingles’ fair value, and declined to offer its own value for the shares.

Areces Fuentes eventually sold his shares for more than 50 million euros, according to a 2009 article in Cinco Dias, a Madrid-based newspaper. Based on that price, the company was valued at 7.1 billion euros at the time of the transaction.

The Bloomberg Billionaires Index takes measure of the world’s wealthiest people based on market and economic changes and Bloomberg News reporting. Each net worth figure is updated every business day at 5:30 p.m. in New York. The valuations are listed in U.S. dollars.